Brazilian Real Strengthens Against Dollar Amid US Credit Downgrade

The Brazilian real continued its upward momentum against the US dollar on Tuesday morning, with the USD/BRL trading at 5.6462, down 0.09% from Monday’s close of 5.6513. This marks the second consecutive session of gains for the Brazilian currency.

The strengthening follows Moody’s downgrade of the United States’ sovereign credit rating from “Aaa” to “Aa1” last Friday, making it the last major rating agency to strip the US of its top-tier status.

Technical indicators on the USD/BRL chart show the pair trading well below its 200-day moving average, currently positioned around 5.87. The currency pair has established a clear downtrend since mid-April, breaking below key support levels.

The recent price action shows the pair testing support near 5.64, with the next significant support level visible around 5.60. The RSI indicator currently sits at 42, suggesting room for further real appreciation without entering oversold territory.

Bollinger Bands show decreased volatility compared to previous weeks, with prices hugging the lower band, indicating sustained downward pressure on the pair.

Brazil’s economic fundamentals provide additional support for the currency. The Finance Ministry recently raised its 2025 GDP growth forecast to 2.4%, up from 2.3% previously projected in March.

Brazil’s External Accounts Strengthen Amid Policy Tightening

The country’s robust trade performance, with an $8.2 billion surplus in April, has strengthened Brazil‘s external accounts amid global uncertainty. Central Bank President Gabriel Galípolo’s hawkish stance has bolstered investor confidence.

The recent decision to raise the Selic rate to 14.75%, its highest level in nearly two decades, has significantly widened the interest rate differential with the US, attracting foreign capital to Brazilian assets.

The renewed currency swap agreement between China and Brazil, signed on May 13, has also supported the real. The RMB190 billion/BRL157 billion agreement, valid for five years, promotes bilateral trade and investment facilitation while supporting financial market stability.

Market projections remain mixed regarding the real‘s future trajectory. Trading Economics forecasts the currency will weaken to 5.73 by quarter-end, while Gov Capital predicts the USD/BRL could drop to 5.60 by May 21 before gradually rising in June.

The dollar’s weakness extends beyond Brazil, with the DXY index declining against major global currencies. Moody’s cited persistent fiscal deficits and rising interest costs as key reasons for the US credit downgrade.

The agency noted that “successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits.” Traders now await Brazil’s inflation data and the minutes from the Federal Reserve’s latest meeting for further directional cues.

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